Capital budgeting - how is the basic wacc calculated

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Reference no: EM13542126

1 - Holding a call option and a put option on the same stock will allow the holder to make money on either the call option or the put option at the strike date. This arrangement is called a __________.

Answer

straddle

cover

call-put

strangle

2 - If you own an option with a strike price of $47.50 and on the expiration date the stock price is $48.50, what should you do, and what will be the result?

Answer

Do not exercise the option.

Exercise the option, buy the stock for $47.50, immediately sell the stock for $48.50, and realize a profit of $1.00.

Exercise the option, buy the stock for $48.50, immediately sell the stock for $47.50, and realize a loss of $1.00.

Do not exercise the option, and request a refund of the price paid for the option.

3 - The __________ applies a higher discount rate to the NPV calculation to sort out higher value projects.

Answer

callable annuity rate

hurdle rate rule

profitability index rule

equivalent annual benefit method

4 - When the market risk of a project that the firm is considering undertaking is equal to the average market risk of the firm's existing investments, the cost of capital of that project is:

Answer

equal to the firm's weighted average cost of capital.

zero.

equal to the firm's market capitalization.

positive.

5 - The price of a call option on a non-dividend-paying stock is:

Answer

usually equal to the intrinsic value of the option.

the same as the price of a call option on a dividend-paying stock.

has no relation to the intrinsic value of the option

always exceeds the intrinsic value of the option.

6 - __________ option allows the holder to exercise the option at any time up to and on the expiration date.

Answer

An American

An European

A full

A progressive

7 - The __________ method is the method that is most commonly used in practice for capital budgeting purposes.

Answer

debt-equity ratio

adjusted present value

weighted average cost of capital

free cash flow to equity

8 - The pre-tax weighted average cost of capital represents the:

Answer

market capitalization of the firm.

average cost of borrowing for the firm.

debt capacity of the form.

investors' required rate of return for investing in the firm.

9 - An option to reduce the scale of a firm's investment in the future is __________ option.

Answer

a growth

an expansion

a withdrawal

an abandonment

10 - The valuation method that determines the value of a proposed investment without any leverage and then adds the value of the interest tax shield of the investment is the __________ method.
Answer

weighted average cost of capital

adjusted present value

free cash flow to equity

debt-equity ratio

11 - Weighted average cost of capital (WACC) is an important consideration in capital budgeting and valuing options. What is WACC, and how is the basic WACC calculated?

Reference no: EM13542126

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